How Doctors are Paid: what it Means for Healthcare in the US

April 7, 2005

Mills College Weekly

Every physicians group, hospital, and private medical office has a “master fee schedule,” a compendium of what different insurers pay for every conceivable procedure, examination, operation, and service a doctor can bill for. A typical schedule has over 20 insurers listed across the top of each sheet and will take well over 600 pages to exhaust the list of services. These schedules capture the essence of how doctors are currently paid. The story of how the schedules were adopted and universalized is fascinating.

By the 1980s, insurers were no longer content to use the old system of basing doctors’ payments on what the doctors themselves held up as typical market prices, and more than general inflation was criticized. Because procedures were billed at much higher rates than diagnoses, a troubling trend that discouraged primary care and encouraged extensive surgical procedures, took hold. The federal government got involved in 1985 and hired William Hsiao, a Harvard economist, to come up with a system that would be consistent, rationally defensible, and bring payment back in line with effort and services rendered.

The formula Hsiao and his colleagues used define work as “a function of time spent, mental effort and judgment, technical skill and physical effort, and stress.” Then, drawing on thousands of interviews with different doctors, they assigned relative numerical values for different procedures.

For example, “they determined that [a] hysterectomy takes about twice as much time as [a] session of psychotherapy, 3.8 times as much mental effort, 4.47 times as much technical skill and physical effort, 4.24 times as much risk. The total calculation: 4.99 times as much work,” according to the April 4 issue of The New Yorker by Dr. Atul Gawande. A numerical value was eventually assigned to every possible medical service.

Congress decided on an appropriate conversion rate between Hsiao’s work numbers and dollars, and thus our federal fee schedule was born. By 1992, Medicare had made the transition. Since then, all of their payments to doctors have been based on the federal standards. Private insurers followed suit, although these companies have unique conversion rates.

While there was, and still is, contention over the work estimations for various things, if doctors were actually reimbursed in accordance with these standards, this might very well be the end of the story. Unfortunately, it’s not.

Because insurance companies are, first and foremost, for- profit companies, they constantly push to increase profits. One way they’ve done this is by rejecting claims. On average, insurance companies reject 30 percent of the claims that they receive. The majority of rejections are based on paperwork requirements that have not been met.

It’s hard not to be cynical when both doctors and patients report the hoops that they must jump through in order to avoid having their claims rejected. Specialists cannot be seen without a referral number, but there must be individual referral numbers for individual office visits and operations. Most operations require an additional pre-approval number. According to Gawande, “afterward, you have to record the referral numbers, the pre-approval number, the diagnosis codes, the procedure codes, the visit codes, your tax I.D. number and any other information the insurer requires, on the proper billing forms…If you get anything wrong, no money — rejected.”

As a result of these and other related frustrations, more and more doctors are opting out of the insurance tangle all together, feeding into a growing, and very lucrative trend known as boutique medicine. These doctors set their own rates and only accept cash payments directly from their patients. It’s up to the patient to pursue their own insurance reimbursements. While I sympathize with the tensions doctors face, I have to believe there are other, more ethical options, for the doctors, the insurance companies, and the government. Here, in what is often touted as the richest country in the world, adequate healthcare is a privilege of the wealthy. Perhaps healthcare never was a right, but we should be moving toward that ideal, not away from it.

How Doctors are Paid: what it Means for Healthcare in the US was published on April 7, 2005 in Sports & Health

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